Please note that bankruptcy cases filed on or after February 1, 2008 (today) will be subject to the Census Bureau’s updated median family income data and the Administrative Expense Multipliers.
You can check out the updated figures at the U.S. Trustee’s “Means Testing” page.
Automatic adjustments to dollar amounts across several sections of the U.S. Bankruptcy Code will take effect on April 1, 2007, impacting Chapter 12 and Chapter 13 eligibility, maximum exemption values in certain categories, means test calculation, and more.
The Memorandum detailing the specific changes is available online at Automatic Adjustment of Certain Dollar Amounts in the Bankruptcy Code and Official Bankruptcy Forms.
Several forms are being updated as a result of the changes including:
Official Form 1, Voluntary Petition
Official Form 6C, Schedule of Property Claimed as Exempt
Official Form 6E, Schedule of Creditors Holding Claims Entitled to Priority
Official Form 7, Statement of Financial Affairs
Official Form 10, Proof of Claim
Official Form 22A, Statement of Current Monthly Income and Means Test Calculation (Chapter 7)
Official Form 22C, Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Chapter 13)
The next scheduled automatic update to these dollar amounts will take effect on April 1, 2010.
Jonathan Ginsberg raises the issue of defining "family size" for median income determinations on his bankruptcy blog. Ginsberg's experience with a dependent child in a non-custodial relationship seems to only scratch the surface of possible variations that might impact the definition of "family size": joint legal custody, split physical custody, college-aged children who live away from home during the school year...
Ginsberg suggests that there are no authoritative answers to these questions at present, leaving this one more area where BAPCPA invites complications, litigation, and inconsistency of application.
A story in the Birmingham News quotes several Alabama bankruptcy attorneys who are not terribly concerned about the means test. According to bankruptcy attorney David Botes, the means test is "not a big deal, it's a red herring." In fact, he predicts that fewer than 10 percent of his clients who wish to file under Chapter 7 will be precluded from doing so because of the means test. Mr. Botes is much more concerned about the burdensome effects of the new tax filing rules (see my November 3rd post on this issue) and the credit counseling requirements.
Tom Reynolds, another Alabama bankruptcy practitioner who is also a local Chapter 7 Trustee, has a helpful tip for those seeking to avoid the pain of the means test. Because "the means test is based on wages during the six months prior to filing, ... some lawyers may have their clients file during a slow period of employment or while they are between jobs." In other words, simply timing the filing of your Chapter 7 case may help you get by the means test.
If a debtor makes more than the median income and, therefore, The Means Test
applies, the amount of priority tax debt has to be evaluated to 1) determine
how much to claim as an average monthly priority debt payment, and 2)
resolve whether disposable income will provide for payment of the lesser of
$10,000 or 25% to unsecured creditors over 60 months. In the past, an
attorney may have recommended to a client to diminish cash assets by paying
down priority tax debts. The trustee would have been unlikely to bring a
preference action against the IRS as the IRS would have been paid first out
of the proceeds of the preference action. So, rather than letting the cash
asset be liquidated, better to use that asset to pay down non-dischargeable
tax debt.
Under the BAPCPA, an attorney may have to tread a bit more lightly. If the
client pays off priority IRS debt, it will serve to 1) reduce the average
monthly priority debt payment and 2) reduce the total amount of unsecured
debt. In the post Bankruptcy Reform Act world, you may want to think twice
about advising your client to pay down the priority tax debt as you may need
the additional priority debt payment to reduce disposable income and to keep
unsecured debt at a high level so that disposable income will not afford the
ability to pay $10,000 or 25% to unsecured creditors.
StartFreshToday has added a quick means test to our application. It allows you quickly assess if your client is a candidate for bankruptcy.
Create a free account at StartFreshToday.com to use it. It is free!
Under the old bankruptcy law, the trustee could bring a 707(b) motion alleging abuse based on a debtor's ability to repay debt with expendable income. Under BARF 707(b)(2), the judge, trustee or creditor can all bring a 707(b) motion to dismiss if the debtor's household has more than the median income for a household of that size. Logic dictates that, under the same provision, neither a creditor, nor the judge, nor the trustee has a right to bring a motion to dismiss no matter how much expendable income the debtor has so long as the debtor's household has less than the median income for a household of that size.
So, in some situations under BARF, this bright line median income test will help debtors escape 707(b) objections. Of course, the judge or trustee can still bring a motion based on 707(b)(3) alleging that the case was not filed in good faith, but, certainly, no presumption of abuse exists.
Much of the country is oblivious to the impoverished state of much of New Orleans and only perceives our great Crescent City as the place to go for great jazz, crawfish and Mardi Gras.
If you have ever driven through New Orleans, however, the level of poverty is striking. Hurricane Katrina will only aggravate that state of affairs. Undoubtedly, many local folks, who could have greatly benefited from filing bankruptcy prior to the law change, now have to worry more about saving their own lives and health than getting out of disaster-debt under a fair set of laws. Earlier this year, movie stars, Americans as a whole and our President stepped to the plate for Tsunami victims.
Stars, time to raise money. Americans, time to lend a helping hand. President, how about a stay on the bankruptcy law change for Hurricane Katrina victims. Law with a twist of reality would be nice, for once.
A basic reality of bankruptcy practice is that debtor income can and does change rapidly. In the BAPCPA environment, an attorney has to be ready to respond to a debtor's change in circumstances. Under BAPCPA 101(10)(A), debtor's income is determined by taking the total income over the last six months and dividing by six (the average monthly income).
If your client notifies you of a sudden increase in income, a quick filing may be in your client's best interest. If you wait two months after the income change, the six-month average may increase by enough to bring your client above the median income for the debtor's household, triggering application of the means test. You may want to file quickly. Of course, keep in mind that you also have to file a disclosure of reasonably anticipated increases and could draw an objection based on a bad faith filing.
Conversely, if your client has a sudden decrease in income, before filing, you should reassess whether the means test applies. By waiting a month to three months, the debtor's six-month average income may decrease by enough to eliminate the application of the means test. Remember that, in any event, the debtor's income has to be reassessed the day before filing to determine an accurate income figure. Any time the means test applies, examine if the debtor will experience a change in circumstances that could affect your advice about when to file the bankruptcy case.
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